Freddie Mac, the second-largest U.S. mortgage finance company behind Fannie Mae, announced that it will raise $5.5 billion in capital following a lower than expected first-quarter loss of $151 million. Keep in mind, however, that “accounting and policy changes” seem to have contributed more than the market to Freddie Mac’s “strong performance.”

In the fourth quarter, Freddie posted a net loss of $2.5 billion, including $1.3 billion in losses on credit guarantees. Because of an accounting change, Freddie didn’t record any such losses or gains in the first quarter.

Losses related to trading securities and derivatives fell to $58 million in the first quarter from $2.1 billion in fourth, largely due to a change in how the company accounts for the value of those assets. Similarly, expenses linked to credit guarantees fell to $258 million from $2.1 billion.

In addition, Freddie spent far less money buying delinquent loans out of pools it had guaranteed — $51 million, compared with $736 million in the fourth quarter — as a result of a decision in December to let delinquent mortgages sit in pools longer before buying them up.

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Comments from “Plugged-In” Readers

It is interesting that nowhere in the mainstream press (other than on Bloomberg terminals) was it reported that Freddie moved its $120 billion portfolio of asset backed securities into Level 3 assets to avoid having to mark them to market. This was clarified in the conference call. Freddie can’t get a price it likes for these securities, so it just moved them into another bucket to make up its own prices. Who really knows what any of that garbage is worth?

Hard to raise capital if you are reporting increasing losses.
The fact that they are trying to raise capital should be a red flag to pretty much ignore their earnings: they would have spent all last quarter dressing those earnings up.